Kenya reintroduces IMF approved Capital Gains Tax (CGT) – Yussuf Bashir

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Kenya

Like their counterparts the world over, Kenyan politicians have long been more reluctant to tax the rich than the poor. But this month, the country reintroduced capital gains tax (CGT) on companies and individuals, 30 years after abandoning it.

It is not the only good news to have come out of Kenya recently. Last October, the government announced plans to retire many corporate tax holidays, in a bid to reduce bureaucratic red tape. The move will broaden the tax base and generate more resources to fund essential services, especially for people living in poverty.

Despite the predictable warnings of big companies and wealthy individuals, the return of CGT and the rolling back of tax incentives are good news for the vast majority of Kenyans, who rely on public services. If those services – from midwives and ambulances to roads and policing – are to be better funded, then tax is the answer. It is cheaper than government borrowing, and more reliable and less conditional than aid.

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The new CGT will be levied on profits made from the sale of property and shares. Kenya suspended CGT in 1985, when the Nairobi stock exchange was started, and it has been very difficult to bring back, even though the exchange has more than 2tn Kenyan shillings (£14bn) in market capitalisation.

Ministers have finally kept their nerve with CGT because they want to boost revenues in order to spend more – and even the IMF has encouraged them to raise tax to pay for greater government spending. They may also have been comforted by the fact that neighbouring Tanzania and Uganda have much higher tax rates on capital gains. Officials have reportedly estimated that CGT in Kenya – at a rate of 5% – will raise about $85m (£56m) a year.

But Kenya’s CGT has had a painful birth. Like other reforms that would more fairly share the tax burden, it became difficult to get it through parliament and may be hard to implement, even now it has become law. Some parliamentarians are too easily convinced about the supposed adverse macroeconomic effects of reforms aimed at powerful institutions like the stock exchange or booming industries such as the real-estate sector.

By contrast, proposals to increase the tax burden on poor people pass through parliament in record time. After all, the poor are not as organised or as obviously powerful as the elite. Nothing exemplifies this more than the speedy enactment of VAT in 2013, on the one hand, and the long struggle to reintroduce CGT, on the other.

VAT is a tax on consumption. It is considered regressive because everyone pays the same amount of tax on a product, regardless of their income. This would not be a problem if VAT was levied only on luxury products like helicopters (which it is not in Kenya). But when levied on essentials like milk and bread, it threatens to put those out of poor people’s reach.

Kenyan civil society has had some influence and, in 2013, the East Africa Tax and Governance Network, a Christian Aid partner, played a critical role in amending the 2013 VAT Act, to reverse the milk and bread price hikes.

The network continues to campaign for additional tax bands on personal income as an alternative to VAT – and more progressive taxation is clearly needed. The UN has consistently ranked Kenya as one of the most unequal states (pdf). On the ground, this is evident in the luxury flats and high-end vehicle dealerships popping up all over Nairobi, in stark contrast to news of drought in hunger-ravaged northern Kenya.

One of the obstacles to more progressive taxation is that it is difficult to distinguish between rich people and politicians. They are mostly one and the same – search who the richest Kenyans are and the list will consist of former cabinet ministers and presidents. Any minister would hesitate to go against the interests of such a formidable group, as CGT is bound to do.

With the introduction of the new tax, ordinary Kenyans must hope that the frantic tax-planning efforts by some, such as selling their prime assets, will not render CGT ineffective and deter further efforts towards fairness in Kenya’s tax system.

 

 


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